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What Is a Ponzi Scheme?

What is a Ponzi Scheme?

From Bernie Madoff and Allen Stanford to Trevor Cook and Arthur Nadel, it seems every con artist out there is a “Ponzi schemer.” But, what does that mean?

What exactly is a “Ponzi scheme”?

A “Ponzi scheme” is a type of investment fraud scheme that involves the payment of false “returns,” “interest,” or “dividends” to some investors from funds contributed by other or newer investors. The scheme takes its name from Charles Ponzi, a man who defrauded thousands of investors and many banks back in 1919.

Unfortunately, no one Ponzi scheme is exactly like another, which makes detecting them somewhat difficult. However, there are ways to protect yourself and understand who are common targets for Ponzi scams.

While today’s Ponzi schemes may differ from one another in size, scope, or strategy, they almost all share the same red flags:

  • Promises of higher than average returns, typically over a short period of time; (Charles Ponzi, for example, promised his investors returns of 50 to 100 percent in as little as three months.)
  • Falsified account statements that show high, consistent gains;
  • High-pressure tactics to keep investors from cashing out;
  • Unauthorized transfers; and/or
  • Misappropriation of investor funds.

Many investors may believe they’re making money off these so-called “investments” although there typically is little to no legitimate investment activity actually taking place. Instead, more and more investors are brought in to keep funding the scheme. When the promoter is unable to bring enough new funds into the scheme to keep up appearances, the entire thing falls apart.

The best way to safeguard your savings from a Ponzi scheme is to avoid becoming a victim in the first place. However, if you believe you may be a victim of a Ponzi scheme, you may be able to recover some of your investment losses. To learn how, click here.

The information contained in The Firm’s posts on its blog, fraud alerts, investigations or elsewhere on the site is based upon information obtained from other sources including, but not limited to, news outlets and federal, state, and regulatory agency filings. All suspects and subjects of postings herein are presumed innocent until proven guilty in a court of law or administrative action and any and all crimes are alleged until a court or regulatory agency finds otherwise .

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